Precision Therapeutics Inc. — FY2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; filed April 1, 2019. The filing is for Precision Therapeutics Inc. (ticker AIPT), not Axe Compute Inc. It reports annual results, not a standalone fourth-quarter period.
Business context
Precision sells the STREAMWAY System, a medical fluid-waste disposal device and related single-use supplies. It is also developing precision-oncology and contract research services through its 25% investment in Helomics, and tumor models through subsidiary TumorGenesis. As of year-end, STREAMWAY sales remained modest: 148 systems had been sold cumulatively through December 2018.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Revenue | $1.412 million | $0.655 million |
| Gross margin | $0.996 million; 71% | $0.507 million; 77% |
| Operating loss | $7.861 million | $6.054 million |
| Net loss | $10.086 million | $6.003 million |
| Loss per share, basic and diluted | $0.79 | $0.94 |
| Cash used in operations | $5.288 million | $4.460 million |
| Cash at year-end | $162,152 | $766,189 |
Revenue rose 116%, reflecting 41 STREAMWAY systems sold in 2018 versus 10 in 2017, sales-force expansion and the first international system sale. Gross margin declined from 77% to 71%; management attributed this partly to helping customers with installation costs. Operating expenses increased, particularly sales and marketing, operations and general and administrative expenses.
Total assets were $3.709 million and total liabilities were $3.656 million at December 31, 2018, leaving $53,472 of stockholders’ equity. Current assets were $1.452 million against current liabilities of $3.656 million. Accounts payable and accrued expenses totaled approximately $1.725 million. The balance sheet lists current notes payable, net of discounts, of approximately $1.635 million across two line items; management also describes $1.7 million of debt at year-end. The filing notes that debt obligations coming due within one year totaled approximately $3.968 million under financing agreements entered into in 2018 and 2019.
Management reported monthly operating cash outflows of approximately $441,000 and an accumulated deficit of $63.108 million. The auditor’s report and management both identify substantial doubt about the Company’s ability to continue as a going concern. The financial statements were prepared on a going-concern basis.
Material changes and unusual items
- Net loss increased by about $4.083 million year over year, despite higher revenue. The 2018 result included a $2.294 million loss on the Helomics equity-method investment.
- Sales and marketing expense rose to $2.369 million from $1.095 million, reflecting additional sales staff, commissions, travel and marketing. Operations expense increased to $1.861 million from $1.415 million, including TumorGenesis-related spending and STREAMWAY product development.
- Other income included a $372,000 unrealized gain from revaluation of a derivative liability. Other expense included amortization of original issue discounts on financing.
- A forbearance arrangement with secured noteholders increased principal and included additional shares; the Company recorded approximately $503,000 in penalty expense. Amended notes carried an 18% default interest rate until the stated default cure.
- The Company corrected immaterial 2017 stock-compensation and tax-related misstatements in its comparative financial statements; it said amended prior filings were not required.
Outlook, transactions and risks
- Management expected continued net losses at least through the first two quarters of 2019 and said additional financing would be needed for operations, sales expansion, product development and Helomics. It warned financing may be unavailable on acceptable terms and could be dilutive.
- Stockholders approved the Helomics merger on March 22, 2019. As of the filing, closing was expected in early April, subject to remaining conditions. The Exchange Offer had been accepted by holders of $7.3 million principal amount of Helomics notes, reported as 96% of aggregate principal.
- The planned merger and exchange were expected to issue substantial common stock, Series D preferred stock and warrants. The filing estimated former Helomics security holders would own about 44.4% of common shares after issuance; exercise of the related warrants could further materially dilute existing shareholders.
- Two registered offerings in March 2019 generated reported net proceeds of approximately $1.1 million each. The CEO also provided additional financing in early 2019. The Company said some financing proceeds could be subject to secured creditors’ repayment rights.
- Precision received a Nasdaq deficiency notice because its bid price had been below $1 for 30 consecutive trading days. It had until May 15, 2019 to regain compliance, with possible additional time subject to Nasdaq requirements.
- Key risks include continued cash burn and near-term debt maturities; dependence on further capital; dilution and secured-debt default remedies; uncertain merger integration and Helomics profitability; slow customer adoption and competition for STREAMWAY; regulatory, reimbursement and clinical-commercialization risks in Helomics; and collection risk on notes receivable, including a defaulted CytoBioscience note.
Most important facts for investors to verify
- Whether the Helomics merger and Exchange Offer closed, the final securities issued, and resulting dilution and ownership.
- Current cash, monthly cash burn, debt balances, maturity schedule, covenant/default status and any restrictions on financing proceeds.
- Nasdaq bid-price compliance and any subsequent listing action.
- Subsequent STREAMWAY system placements, recurring disposable sales, gross margins and evidence of sustained customer adoption.
- Helomics’ actual revenue, cash requirements, reimbursement collections and performance of the CRO, D-CHIP and tumor-model programs.
- Recoverability of notes receivable, including Helomics advances and CytoBioscience repayments, and any further related-party financing.